This week Pension Funds Insider spoke to former chairman of the National Association of Pension Funds and the European Federation for Retirement Provision, Alan Pickering, and sought his opinion how pension schemes can negotiate these volatile times

Pension Funds Insider (PFI): What, in your opinion, are the biggest challenges faced by UK pension schemes nowadays?

Alan Pickering (AP): The biggest challenge is to deal simultaneously with the defined benefit (DB) legacy and respond to the defined contribution (DC) challenge, we have to do so in such a way that they are fair by both DB an DC members and we have to do so in possibly the worst economic conditions that we can remember.

PFI: What can be done to keep DB schemes going?

AP: One of the problems with DB schemes is that employers are being asked to honour benefits which they are never themselves voluntarily offered. Governments have over the years increased both the quality and the quantity of DB and employers have had to underwrite this. Each of these legislative improvements is very attractive from a consumer's point of view but the cumulative effect is toxic for schemes. I think that all of us; politicians, employers, trustees and their member representatives have to see if there are ways in which we can offer benefits in a way that makes them affordable and isn't needlessly hurting scheme member expectations.

PFI: How likely is it that we will see these changes in the near future?

AP: Well, one of the heartening things I see at the moment is Steve Webb's (UK pensions minister) willingness to explore a 'third way', something in between DB and pure DC. I don't know if we are going to get to this third way by getting what you could call a 'DB-lite' system, or whether we are going to get there by introducing risk-sharing elements into the DC offering, but I live in hope that before too long we will able to find that third way which doesn't cripple employers but just provides members with more security than is the case in a pure DC environment.

What we also see is that Webb recognises that the real weak link is the state scheme. Previous governments have neglected that as it was much easier to use their firepower on employers than to tackle the mess in their own backyard. We have the worst state pension system in the whole of the developed world, and since that state pension is the foundation on which everything is built, if that foundation is wobbly, the building isn't very secure.

PFI: You have worked for the EFPR, do you personally feel the pensions industry in the UK would be stronger with or without EU legislation?

AP: We do have a lot to learn from each other in Europe and fortunately that is possible now. When I was chairman of the EFRP I was a big believer of diversity between and within countries so we could delegate to national governments and learn from national governments. But we have to recognise that there are different customs, different tax arrangements and different pension arrangements, and we shouldn't seek to impose a straight-jacket on all EU members that ignores where we are coming from and where we are trying to go to.

We need to learn from Europe but not impose each other's solutions on each other.

PFI: When it comes to Solvency II, is the government doing enough to protect UK DB schemes from another potential blow?

AP: There are people at the moment who are trying to impose an insurance-like framework on occupational pension schemes and whilst I respect where they are coming from I want them to respect where I am coming from and there is a real danger that we increase the price of the promise up to a point where it is undeliverable. We already see that here with DB, if the drive towards Solvency II is so rigid and so quick then not only are we going to damage peoples' pensions but also their employment prospects.

PFI: Where do you feel pension schemes can improve themselves most: better governance, member communication or investment strategy?

AP: Member communication is important - especially in a DC environment - but I don't regard it as fulfilling it as a regulatory role. There is a danger that disclosure of information to members is seen as a form of regulation. It confuses two issues; communication is to help members make decisions. Disclosure of communication to members can get in the way of that decision making process.

In terms of strengthening governance I believe in a broadly-based trustee board, that board should increasingly become strategic and non-executive in nature. There has been a tendency in recent years for trusteeship to become very detailed and very interventionist. We have become very micro-manager in our approach and should in fact be much more strategic than we are, if we want to continue to attract heavy-hitters from the sponsoring company. These people want to leave a meeting knowing that they have been able to make a difference in terms of strategic decisions. The trustees make the big decisions but then they need to delegate the rest.

We need to run our schemes the way we run our businesses but we must never lose sight of the fact that the most important people in that business are the customers. The purpose is to deliver the promises affordably and efficiently.

azeevalkink@wilmington.co.uk